Ever since FB went public, there has been a lot of commentary on FB’s mobile monetization strategy (or lack of it). I think FB has good growth ahead (still doesn’t justify the $100B IPO valuation though!). Mobile has only increased users’ engagement on FB. Investors who harp on FB’s mobile monetization strategy display the same characteristics as those who were skeptical of FB’s success in display ads 2-3 yrs back.

But lets examine at how mobile can potentially cripple the big gorilla in online ads – Google.

At a high level, things seem to be going great for Google on Mobile

Android
Unlike MSFT, Google was very quick to realize how mobile is going to fundamentally change computing. Instead of being content as the default search engine on iOS, they built a second and now bigger smartphone ecosystem. The benefits of Android and how it feeds into Google’s core search business is well analyzed by many. Check out the excellent post from Bill Gurley. With Android, Google has ensured (for now) that it is the default search engine on almost all smartphones and continue its Search dominance.

Explosion of connected smartphones
According to industry reports there are now over 780M smartphones globally compared to 1057M PCs. While the PC shipments are growing at < 10%, smartphone shipments are growing > 40%. By 2016, smartphones would be over 2.5B, while PCs would still be around 1B. And the percentage of smartphones with data plans (hence always connected) is increasing very rapidly. So the potential access points for Google search can treble in the next few years.

Per captia mobile search volume
Unlike desktop, people interact with their smartphones much more frequently. Its available on the go, connected and is much more personal. The per capita search traffic from mobile would be much higher – 5x doesn’t seem to be a stretch at all.

All in all, we can expect a 5x-10x increase in search volumes for Google in the next 5 yrs because of mobile.

With so many great things, why should Google be worried about mobile?

1. Sirilikepersonal assistants
Voice based discovery engines such as Siri fundamentally change the way users discover information. Android is coming up with its own Google Now “personal assistant”. The biggest challenge for Google is: How to monetize “searches” over Siri type voice interfaces? What is the equivalent of AdWords for Siri type voice searches? This is a big unknown and innovation needs to happen on newer ad formats which are natural for Siri like voice interfaces. I suspect that the profitability per search query in the context of newer ad formats will be a lot less than it is now.

2. Revenue or profit per search on Mobile
Even for the cases, when users actually “see” (not hear) the search results on the screen, number of ads that can be shown will be significantly less – 1 or 2 per screen on mobile, instead of 8-10 per screen on desktop. The impact will be mitigated because Google shows ads with high CTR and which are highest paid, but the revenue/ search on Mobile will be quite less compared to that of desktop.

Essentially (1) & (2) mean that the increase in traffic to Google doesn’t translate to a proportionate increase in ad inventory and thereby revenue. Will a 10x increase in traffic only translate to 2x-3x increase in ad spots? This has big implications to Google’s revenue growth rate and profitability – more search queries are needed to generate the same revenue, but the cost/query for Google doesn’t change.

3. Samsung getting chummy with Bing/ alternate search engines
While Google has done a great job of building the Android ecosystem, powerful partners (such as Samsung) can start introducing their own variants (which Amazon did with Kindle Fire). Apple most probably will not extend the search contract for iOS once it masters Siri and develops its own “search/ personal assistant” functionality. Samsung can choose to replace Google as the default search engine – this is a great opening for Bing to be aggressive and strike partnerships with the likes of Samsung, HTC instead of suing them

4. Display Ads on Mobile
Display Ad business in general is having a tough time. CPMs are going down. Effectiveness is doubtful – retargeting seems to be the only effective display ad mechanism. With mobile the problems get multiplied. CPMs are a fraction of what they are on desktop. Retargeting is quite difficult to achieve (atleast to the extent its possible on desktop). In general, Display Ads on Mobile will not significantly impact Google’s growth.

5. Mobile Ads:Desktop Ads:: Online Ads: Offline Ads
Just as online ads disrupted the traditional ads business (for publishers, agencies and brands), mobile is disrupting the desktop ads business. For a new company this presents an opportunity, but for Google which is the dominant player in desktop ads – this disrupts the business model. Even if Google dominates mobile ads (and they seem to be doing many right things) the fat profit margins it is used to (in the desktop world) will start getting squeezed.